This is probably the most often asked question by restaurant owners, managers and chefs. If you are smart enough to be calculating your actual food and liquor costs by performing a physical inventory, then you are half way there.
This article will discuss a very important part of controlling food and liquor costs, one that most restaurants do not do. To many of you, this will be new information. To many others, this is something you’ve heard myself and others talk about, but have never known how to actually perform the task. This article is about ideal costs, why they’re important, how to calculate them and what to do with the information.
What are ideal costs?
Ideal costs are the dollars that the product you’ve sold should have cost you to sell. They tell you that if you’ve sold 20 hamburgers and 10 steaks, that it should have cost you “x” amount of dollars.
Why are ideal costs important?
Ideal costs are important because they give you a scale to measure your actual food costs against. When you perform a physical inventory at the beginning of a period and calculate it’s value, add your purchases for the period, then subtract the value of your physical inventory for the end of the period, you are calculating your actual costs. This is the amount of dollars the food you sold during that period actually cost you to sell. This number is imperative to know if you want to control your product costs. However, most operators make the mistake of using this number all by itself to determine if they have cost problems. They only compare it against a budgeted cost percentage. With only doing this, there is absolutely no way to know if your actual cost is good or bad, only that it is higher or lower than some arbitrary budget number. It’s relativity to the budgeted number does you no good because your budget number does not take into account your sales mix. If you set your budgeted food cost for example, at 35%, and your actual cost is 40%, many chefs/managers/operators will assume there is a problem with the costs. The error with this assumption is that a simple change in your sales mix could have created this variance, and there may be absolutely no problem with waste, theft or any other issue. As a matter of fact, what you’ve experienced could be a desirable situation where you’ve sold a higher number of high cost percentage, high gross profit menu items during that period. This would cause your actual food cost to be higher, but it will also drive your profit higher, creating a situation where you might actually reprimand your staff for doing something good! After all, you’d rather sell 5 steaks that cost $10 and sell for $20 ($50 gross profit) than you would 5 hamburgers that cost $2 and sell for $8 ($30 gross profit), wouldn’t you?
How do you calculate ideal costs?
To calculate ideal costs, you need to know how much your menu items cost to make, whether they are food items, liquor drinks or beer (luckily the recipe for a bottle of Bud is pretty easy to cost out). This requires that you make recipes for all your food items, and calculate costs per pour for all your liquor and tap beer. Bottle beer costs what you buy it for. If you know how, liquor and beer costs can be calculated right in your inventory spreadsheets. I have spreadsheets that make these calculations automatically when you enter in bottle and keg costs, in addition to pour sizes. Food items should have a recipe spreadsheet created for each of them. To make recipe calculation easier, you can link recipe spreadsheets to your inventory spreadsheets which will update your costs as you update your inventory prices. If you don’t know how, just do the math by hand and update your recipe costs at least every six months, or you can email me at email@example.com to help you.
Once you know what every item you sell costs you, you have to track how many of each item you sell. I suggest using a spreadsheet to track these numbers to keep things organized. When you know how much of each item you sold for a period, and you know how much each of those items cost you to sell, you can multiply those two numbers together to come up with an ideal cost for those items sold. This is what those items should have cost you to sell.
What do you do with all this information?
When you calculate your ideal costs for a period, and you also have performed a physical inventory and calculated an actual cost for the same period, you have the information to truly control your product costs. Convert your ideal costs to a cost percentage by dividing your ideal cost by your sales for the period. Convert your actual costs to a cost percentage by dividing your actual cost by your sales for the period. Compare these two percentages. There should be no more than a 1.5% difference between the two. The smaller the better. If you have a larger variance, you know that you have product getting wasted or stolen, unless there is an error in your calculations. Without using ideal costs to compare actual costs to, you may think there is waste or theft when there isn’t.
Comparing ideal and actual costs is an incredibly powerful cost control tool for your business. You can learn to know when you have a problem, or when you just may need to raise prices.
Not every operator, chef or manager has the ability to create the spreadsheets necessary to calculate ideal costs. To save you time and provide you with a cost control tool that can save you thousands of dollars, I’ve already created this tool. You can visit my webstore at http://www.bodellconsulting.com/webstore.html to find a downloadable file with spreadsheets for tracking your sales by item and calculating not only your ideal food costs, but also your ideal liquor, beer and tobacco costs. If you need help setting up your spreadsheets, you can reach Brandon O’Dell at 1-888-571-9068 to purchase telephone consultations.
If you would like to purchase the Ideal Food, Alcohol and Tobacco Tracking Spreadsheets directly, just follow this link. We process payments through Paypal. If you do not have a Paypal account, simply follow the “continue” link next to the credit card icons on the bottom left of the page:
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